Well begun, but Arun Jaitley has many more miles to go

The finance minister aims to mend public finances, keep policies consistent and taxes non-adversarial. But, these are extraordinary times.

In ordinary times, government budgets, pretty much like household financial plans, are about prioritising spending, earning funds, setting medium- to long-term goals and creating assets that yield returns for generations. But, these are extraordinary times. The economy is falling off a cliff snowed under a mountain of problems. Its GDP grew at an average of 4.6% in the last two years, the first time in a quarter of a century it has grown at sub-5% in two consecutive years. Retail prices have averaged 10%. Worse, public finances are in a mess. Put together, all these point towards ‘Stagflation’, a descriptor first used in the British Parliament by Iain Macleod in 1965, referring to an economic situation characterised by flat income growth, persistent high prices and growing unemployment over a sustained period. Union finance minister Arun Jaitley, therefore, did not receive the best of conditions to present the new government’s maiden budget.

Mr Jaitley had little leg room to splurge. Tough measures, like cutting subsidies, mean prices going up and away. High inflation is bad news for growth. On the other hand, cutting taxes to give more money in the hands of people to spend and companies to invest would mean lower earnings for the exchequer. India’s fiscal deficit for 2013-14 stood at 4.5% of GDP. The then Union finance minister, P Chidambaram, in the interim budget presented in February, had projected the deficit to be 4.1% of GDP in the current year. The lower budget gap last year was aided largely by austerity measures that have yielded spending cuts of `75,000 crore, and tailoring the fuel subsidy bill, which ended up lower because the government won’t pay subsidies to petroleum companies this year. The fiscal deficit in the first two months of the 2014-15 financial year touched `2.4 lakh crore or 45.6% of the full-year target, the government data shows. There’s little room for extra spending. Simply put, it’s like being slapped with a steep hospitalisation bill when one was already broke.

Mr Jaitley had the added task of reworking a few nifty tweaks made by his predecessor that had helped window-dress the books to present a healthy government balance sheet. The new Union finance minister has shown remarkable political courage in loosening a firm grip on the fisc.

Mr Jaitley’s clarification on the controversial retrospective tax will go a long way in re-establishing India’s pride of place among the comity of hot investment destinations. He also set the record straight on the government’s reforms agenda, announcing that foreign investment norms in insurance and defence will be eased to 49%. Read between the words and there is a clear, and welcome, broad message in his budget: Mend public finances first, keep policies consistent and taxes non-adversarial. The rest will follow. It was a sign that he was willing to step out of his comfort zone in many ways. He based the first part of the Narendra Modi-led NDA government’s first budget on a cautious ‘stay-the-course’ approach, keeping in mind a still-fragile economy, rather than falling prey to the tendency to play to the gallery.

Runaway government borrowing and lower-than-anticipated earnings were choking India’s growth prospects, presenting Mr Jaitley with a difficult task: Raise revenues and cut unproductive expenditure without stuttering the growth engine that is meandering at decade-low rates. The minister promised to cap the deficit at 4.1% of GDP in 2014-15. Slippage here, by the government’s admission, posed a significant risk to consolidation that anticipates the fiscal deficit will shrink to 3% of GDP by 2016-17. Subsidies are projected to stay at `2,60,657 crore next year, only marginally higher than last year’s `2,55,516 crore, despite provisioning for a new food entitlement plan.

Despite the slowdown, Mr Jaitley has pencilled in 13% growth in tax revenues in 2014-15. The growth in earnings assumptions — based on asset sales of state-owned firms and rise in indirect tax revenues — is vital to meet a host of other metrics that the minister has set out for the year. The tricky bit, however, was to send the right signals on the government’s intent to walk the talk on its poll-pledge of ‘Acche din aane wale hain’. After all, India’s young electorate had voted not just for change, but also for jobs and growth. For this, the Union finance minister relied on a text book primer: Invest in human capital and make it easier for businesses to flower.

This gradualism is more sensible than a big-bang approach. If successful, Mr Jaitley’s model of economic turnaround can be a kind of transformational illustration for others to emulate to counter persistent downturn and unemployment. Having begun well, Mr Jaitley will now have to go the distance to decisively shift the policy mix. India cannot tarry its tryst with economic destiny forever.